Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):

Large Accelerated
Filer o Accelerated
Filer o Non-Accelerated
Filer þ

Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ

The number of shares of the Registrants common stock, par
value $0.01 per share, outstanding as of October 31, 2007
was 29,289,013.

KBW, Inc. is required to file current, annual and quarterly
reports, proxy statements and other information required by the
Securities Exchange Act of 1934, as amended (the Exchange Act),
with the Securities and Exchange Commission (SEC). You may read
and copy any document we file with the SEC at the SECs
Public Reference Room located at 100 F Street, N.E.,
Washington, DC 20549. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.
In addition, the SEC maintains an internet website at
http://www.sec.gov,
from which interested persons can electronically access our SEC
filings.

We will make available free of charge through our website
http://www.kbw.com,
our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
proxy statements, Forms 3, 4 and 5 filed by or on behalf of
directors, executive officers and certain large stockholders,
and any amendments to those documents filed or furnished
pursuant to the Exchange Act. These filings will become
available as soon as reasonably practicable after such material
is electronically filed with or furnished to the SEC.

We also make available, on the Investor Relations page of our
website, our (i) Corporate Governance Guidelines,
(ii) Code of Business Conduct and Ethics,
(iii) Supplement to Code of Business Conduct and Ethics for
CEO and Senior Financial Officers, and (iv) the charters of
the Audit, Compensation, and Corporate Governance and
Nominations Committees of our Board of Directors. You will need
to have Adobe Acrobat Reader software installed on your computer
to view these documents, which are in the PDF format. These
documents will also be available in print without charge to any
person who requests them by writing or telephoning: KBW, Inc.,
Office of the Corporate Secretary, 787 Seventh Avenue,
4th
Floor, New York, New York, 10019, U.S.A., telephone number
(212) 887-7777.
These documents, as well as the information on our website, are
not a part of this report.

The consolidated financial statements include the accounts of
KBW, Inc., and its wholly owned subsidiaries (the
Company), Keefe, Bruyette & Woods, Inc.
(Keefe), Keefe, Bruyette & Woods Limited
(KBWL), KBW Asset Management (KBWAM) and
KBW Ventures, Inc. (Ventures). Keefe is a regulatory
member of the Financial Industry Regulatory Authority
(FINRA) and is principally a broker-dealer in
securities and a market-maker in certain financial services
stocks and bonds in the United States. KBWL is authorized and
regulated by the U.K. Financial Services Authority
(FSA) and a member of the London Stock Exchange,
Euronext, Virt-x and Deutsche Boerse. Keefes and
KBWLs customers are predominantly institutional investors
including other brokers and dealers, commercial banks, asset
managers and other financial institutions. Keefe has clearing
arrangements with Pershing LLC and Fortis Securities LLC on a
fully disclosed basis. KBWL has a clearing arrangement with
Pershing Securities Limited on a fully disclosed basis.

These consolidated financial statements and these notes are
unaudited and exclude some of the disclosures required in annual
financial statements. These unaudited consolidated financial
statements should be read in conjunction with the Companys
audited consolidated financial statements and notes thereto for
the year ended December 31, 2006 included in its Annual
Report on
Form 10-K
filed with the Securities and Exchange Commission
(SEC). These consolidated financial statements
reflect all adjustments that are, in the opinion of management,
necessary for the fair statement of the results for the interim
periods. The results of operations for interim periods are not
necessarily indicative of results for the entire year.

(2)

Summary
of Significant Accounting Policies

(a)

Principles
of Consolidation

The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All inter-company
transactions and balances have been eliminated.

In June 2005, the Financial Accounting Standards Board
(FASB) ratified the consensus reached by the
Emerging Issues Task Force on Issue
No. 04-5,Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners Have Certain Rights
(EITF 04-5).EITF 04-5
presumes that a general partner controls a limited partnership,
and should therefore consolidate a limited partnership, unless
the limited partners have the substantive ability to remove the
general partner without cause based on a simple majority vote or
can otherwise dissolve the limited partnership, or unless the
limited partners have substantive participating rights over
decision making. This guidance became effective upon
ratification by the FASB on June 29, 2005 for all newly
formed limited partnerships and for existing limited
partnerships for which the partnership agreements have been
modified. For all other limited partnerships, the guidance is
effective no later than the beginning of the first reporting
period in fiscal years beginning after December 15, 2005.
The Company is the general partner of asset management
partnerships and has generally provided limited partners with
rights to terminate the partnership or remove the Company as the
general partner. Therefore, the adoption of
EITF 04-5
did not have a material impact on the consolidated financial
statements.

(b)

Use of
Estimates

The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts reported in the Companys financial statements and
these footnotes including securities valuations, compensation
accruals and other

matters. Management believes that the estimates used in
preparing the Companys consolidated financial statements
were reasonable. Actual results may differ from these estimates.

(c)

Cash
and Cash Equivalents

Cash equivalents include investments with an original maturity
of three months or less when purchased. Due to the short-term
nature of these instruments, carrying value approximates their
fair value.

(d)

Fair
Value of Financial Instruments

Substantially all of the Companys financial instruments,
as defined in Statement of Financial Accounting Standards
(SFAS) No. 107, Disclosures About Fair Value
of Financial Instruments, are recorded at fair value or
contract amounts that approximate fair value.
SFAS No. 107 defines fair value of a financial
instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Financial
instruments owned and financial instruments sold, not yet
purchased are stated at fair value, with related changes in
unrealized appreciation or depreciation reflected in principal
transactions, net in the accompanying consolidated statements of
income. Financial instruments carried at contract amounts
include receivables from clearing brokers, payable to clearing
broker, securities purchased under resale agreements, short-term
borrowings and securities sold under repurchase agreements.

The Company elected to early adopt SFAS No. 157,
Fair Value Measurements, as of January 1, 2007.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and requires enhanced
disclosures about fair value measurements.
SFAS No. 157 defines fair value as the price
that would be received to sell an asset and paid to transfer a
liability in an ordinary transaction between market participants
at the measurement date. Additionally,
SFAS No. 157 disallows the use of block discounts on
positions traded in an active market as well as nullifies
certain guidance in Emerging Issues Task Force
No. 02-3
regarding the recognition of inception gains on certain
derivative transactions. See Note 3 of the Notes to
Consolidated Financial Statements for a complete discussion of
SFAS No. 157.

Under SFAS No. 157, fair value is generally based on
quoted market prices. If quoted market prices are not available,
fair value is determined based on other relevant factors,
including dealer price quotations, price activity for equivalent
instruments and valuation pricing models. Among the factors
considered by the Company in determining the fair value of
financial instruments are discount margins, weighted average
spreads, discounted anticipated cash flows, the terms and
liquidity of the instrument, the financial condition, operating
results and credit ratings of the issuer or underlying company,
the quoted market price of publicly traded securities with
similar duration and yield, as well as other measurements.

Equity interests in certain private securities and limited
partnership interests are reflected in the consolidated
financial statements at fair value, which is often represented
at initial cost until significant transactions or developments
indicate that a change in the carrying value of the securities
is appropriate. This represents the Companys best estimate
of exit price as defined by SFAS No. 157. The
Companys partnership interests are generally recorded at
fair value based on valuations provided by general partners.
Generally, the carrying values of these securities will be
increased based on company performance and in those instances
where market values are readily ascertainable by reference to
substantial transactions occurring in the marketplace or quoted
market prices. Reductions to the carrying value of these
securities are made when the Companys estimate of net
realizable value has declined below the carrying value.

Securities
Purchased Under Resale Agreements and Securities Sold Under
Repurchase Agreements

Securities purchased under resale agreements and securities sold
under repurchase agreements are accounted for as collateralized
financing transactions. The assets and liabilities that result
from these agreements are recorded in the consolidated
statements of financial condition at the amounts at which the
securities were sold or purchased, respectively. It is the
policy of the Company to obtain possession of collateral with a
market value equal to or in excess of the principal amount
loaned under the resale agreements. Collateral is valued daily
and the Company may require counterparties to deposit additional
collateral or return collateral pledged when appropriate.

The market value of the collateral accepted by the Company under
resale agreements was $48,288 and $62,237 at September 30,
2007 and December 31, 2006, respectfully, substantially all
of which has been resold or re-pledged. The resale agreements
have subsequently been closed out at their contract values.

(f)

Receivables
From and Payable to Clearing Brokers

Receivables from and payable to clearing brokers include
proceeds from financial instruments sold including financial
instruments sold not yet purchased, commissions related to
securities transactions, margin loans and related interest and
deposits with clearing brokers. Proceeds related to financial
instruments sold, not yet purchased may be restricted until the
financial instruments are purchased.

(g)

Investment
Banking

The Company earns fees for underwriting securities offerings,
arranging private placements and providing strategic advisory
services in mergers and acquisitions (M&A) and
other transactions.



Underwriting revenues. The Company earns
underwriting revenues in securities offerings in which it acts
as an underwriter, such as initial public offerings, follow-on
equity offerings and fixed income offerings. Underwriting
revenues include management fees, underwriting fees and selling
concessions, including fees related to mutual thrift
conversions. Underwriting revenues are recorded, net of related
syndicate expenses, at the time the underwriting is completed.
In syndicated underwritten transactions, management estimates
the Companys share of transaction-related expenses
incurred by the syndicate, and the Company recognizes revenue
net of such expense. On final settlement, the Company adjusts
these amounts to reflect the actual transaction-related expenses
and resulting underwriting fee.



Strategic advisory revenues. The
Companys strategic advisory revenues primarily include
success fees, as well as retainer fees, earned in connection
with advising companies, both buyers and sellers, principally in
M&A. The Company also earns fees for related advisory work
and other services such as providing fairness and valuation
opinions. Strategic advisory revenues are recorded when the
transactions or the services (or, if applicable, separate
components thereof) to be performed are substantially complete,
the fees are determinable and collection is reasonably assured.



Private placement revenues. The Company earns
agency placement fees in non-underwritten transactions such as
private placements, including securitized debt offerings
collateralized by financial services issuers securities.
Private placement revenues are recorded when the services
related to the underlying transaction are completed under the
terms of the engagement. This is generally the closing date of
the transaction.

Since the Companys investment banking revenues are
generally recognized at the time of completion of each
transaction or the services to be performed, these revenues
typically vary between periods and may be considerably affected
by the timing of the closing of significant transactions.

Furniture and equipment are carried at cost and depreciated on a
straight-line basis using estimated useful lives of the related
assets, generally two to five years. Leasehold improvements are
amortized on a straight-line basis over the lesser of the
economic useful life of the improvement or the term of the
respective leases.

(i)

Income
Taxes

Deferred tax assets and liabilities are recognized for the
future tax attributable to differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in earnings
in the period that includes the enactment date.

As of January 1, 2007 the Company adopted FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109,
(FIN 48), which prescribes a single,
comprehensive model for how a company should recognize, measure,
present and disclose in its financial statements uncertain tax
positions that the company has taken or expects to take on its
tax returns. Income tax expense is based on pre-tax accounting
income, including adjustments made for the recognition or
derecognition related to uncertain tax positions. The
recognition or derecognition of income tax expense related to
uncertain tax positions is determined under the guidance as
prescribed by FIN 48.

(j)

Foreign
Currency Translation

The Company translates the balance sheets of KBWL at the
exchange rates in effect at the balance sheet date. The
resulting translation adjustments of KBWL are recorded directly
to accumulated other comprehensive income. The consolidated
statements of income and cash flows are translated at the
average rates of exchange during the year.

(k)

Earnings
Per Share (EPS)

In connection with the initial public offering
(IPO), the Company completed a 43 for 1 stock split
in the form of a dividend on November 1, 2006 on all then
outstanding shares. All references to number of shares and
restricted stock units and per share amounts in these
consolidated financial statements and accompanying notes have
been adjusted to reflect the stock split on a retroactive basis
as if such stock split had occurred on January 1, 2004.

Basic earnings per share are computed by dividing net income by
the weighted-average number of common shares outstanding for
each period. Basic earnings per share includes legally vested
Restricted Stock Units (RSUs). Diluted earnings per
share are calculated by adjusting the weighted average
outstanding shares to include the number of additional common
shares that would have been outstanding if the diluting
potential common shares had been issued.

(l)

Stock-Based
Compensation

On January 1, 2006, the Company adopted
SFAS No. 123 (R), Share-Based Payment, using
the modified prospective method, which requires measurement of
compensation cost for all stock-based awards at fair value at
the date of grant and recognition of compensation expense over
the requisite service period, net of estimated forfeitures.
Stock-based awards that do not require future service (i.e.
vested awards, including awards granted to retirement eligible
employees) are expensed immediately on the date of grant. No
adjustment to reflect the net cumulative impact of estimating
forfeitures in the determination of period expense was deemed
necessary.

In connection with the adoption of SFAS No. 157 in the
first quarter of 2007, the Company reclassified Securities
not readily marketable, at fair value to Financial
instruments owned, at fair value and reclassified
Net gain on investments to Principal
transactions, net. Certain amounts from prior periods have
been reclassified to conform to the current period presentation.

(3)

Financial
Instruments

The Company elected to early adopt SFAS No. 157,
Fair Value Measurements, as of January 1, 2007.
SFAS No. 157 applies to all financial instruments that
are being measured and reported on a fair value basis. This
includes those items currently reported in financial instruments
owned, at fair value and financial instruments sold, not yet
purchased, at fair value on the consolidated statements of
financial condition.

As defined in SFAS No. 157, fair value is the price
that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date. In determining fair value, the Company
uses various methods including market, income and cost
approaches. Based on these approaches, the Company often
utilizes certain assumptions that market participants would use
in pricing the asset or liability, including assumptions about
risk and or the risks inherent in the inputs to the valuation
technique. These inputs can be readily observable, market
corroborated, or generally unobservable firm inputs. The Company
utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs.
Based on the observability of the inputs used in the valuation
techniques the Company is required to provide the following
information according to the fair value hierarchy. The fair
value hierarchy ranks the quality and reliability of the
information used to determine fair values. Financial instrument
assets and liabilities carried at fair value have been
classified and disclosed in one of the following three
categories:

Observable market based inputs or unobservable inputs that are
corroborated by market data.

Level 3

Unobservable inputs that are not corroborated by market data.

Level 1 primarily consists of financial instruments whose
value is based on quoted market prices such as listed equities.
Additionally, this category also includes U.S. Government
and agency securities for which the Company typically receives
independent external valuation information.

Level 2 includes those financial instruments that are
valued using models or other valuation methodologies calibrated
to observable market inputs. These models are primarily
industry-standard models that consider various assumptions,
including discount margins, weighted average spreads, discounted
anticipated cash flows, the terms and liquidity of the
instrument, the financial condition, operating results and
credit ratings of the issuer or underlying company, the quoted
market price of publicly traded securities with similar duration
and yield, time value, yield curve, default rates, as well as
other measurements. Substantially all of these assumptions are
observable in the marketplace, can be derived from observable
data or are supported by observable levels at which transactions
are executed in the marketplace. Financial instruments in this
category include certain corporate and other debt, including
pooled trust preferred securities and trust preferred securities
held for PreTSL securitizations, and certain restricted stock.

Level 3 is comprised of financial instruments whose fair
value is estimated based on internally developed models or
methodologies utilizing significant inputs that are unobservable
from objective sources. Included in this category are limited
and general partnership interests, private equity securities and
certain corporate debt.

In determining the appropriate levels, the Company performed a
detailed analysis of the assets and liabilities that are subject
to SFAS No. 157. At each reporting period, all assets
and liabilities for which the fair value measurement is based on
significant unobservable inputs are classified as Level 3.

The non-derivative trading inventory category includes
securities such as listed equities, U.S. Treasuries, other U.S.
Government and agency securities, corporate and other debt,
limited and general partnership interests and private equity
securities. They are reported in financial instruments owned, at
fair value and financial instruments sold, not yet purchased, at
fair value on the consolidated statements of financial condition.

The derivatives trading inventory balances in the table above
are reported on a gross basis by level. The Companys
derivative activities included in financial instruments owned
and financial instruments sold, not yet purchased consist of
writing and purchasing listed equity options. The fair value of
the individual derivative contracts are reported gross in their
respective levels based on the fair value hierarchy.

The following tables provide a reconciliation of the beginning
and ending balances for the non-derivative trading assets
measured at fair value using significant unobservable inputs
(Level 3):

Total gains and losses represent the total gains
and/or
losses (realized and unrealized) recorded for the Level 3
assets and are reported in principal transactions, net in the
accompanying consolidated statements of income. Additionally,
the change in the unrealized gains and losses are often offset
by realized gains and losses during the period.

Purchases/sales represent the net amount of Level 3 assets
that were either purchased or sold during the period. The
amounts are recorded at their end of period fair values.

Net transfers in
and/or out
represents existing assets that were previously categorized as a
higher level and the inputs to the model became unobservable
during the period. Such reclassifications are reported at fair
value in the month in which the changes occur.

The amount of unrealized gains and losses included in earnings
attributable to the change in unrealized gains and losses
relating to Level 3 assets still held at the end of the
period were reported in principal transactions, net in the
accompanying consolidated statements of income. The change in
unrealized gains and losses are often offset by realized gains
and losses during the period.

(4)

Short-Term
Borrowings

The Company obtains secured short-term borrowings primarily
through bank loans. The short-term borrowings average balances
for the nine months ended September 30, 2007 and for the
year ended December 31, 2006 were $34,898 and $54,500,
respectively. Secured short-term borrowings was $84,750 at the
rate in effect of 5.33% as of September 30, 2007. Secured
short-term borrowings were $28,500 at the rate in effect of
5.92% as of December 31, 2006. Included in financial
instruments owned as of September 30, 2007 and
December 31, 2006 was $113,000 and $38,000 of corporate
bonds, respectively, in which the lender has a security interest
in connection with short-term borrowings.

(5)

Commitments
and Contingencies

(a)

Leases

The Company entered into a sublease in August 2007 for
additional space in its New York office, expected to commence
June 2008. As a result, future minimum lease payments will
increase approximately $0 for 2007, $1,000 for 2008, $3,000 for
2009, $3,000 for 2010, $3,000 for 2011 and $11,000 thereafter.

(b)

Litigation

In the ordinary course of business, the Company may be a
defendant or codefendant in legal actions or the subject of a
regulatory investigation. The Company believes, based on
currently available information, that the results of such
proceedings or investigations, in the aggregate, will not have a
material adverse effect on the Companys financial
condition. The results of such proceedings or investigations
could be material to the Companys operating results for
any particular period, depending, in part, upon additional
developments affecting such matters and the operating results
for such period. Legal reserves are established in accordance
with SFAS No. 5, Accounting for Contingencies,
which considers the probability of the loss and whether the
amount can be reasonably estimated. Once established, reserves
are adjusted based on changes in the probability of loss or when
an event occurs requiring a change.

(c)

Limited
Partnership Commitments

As of September 30, 2007, the Company had approximately
$41,654 in outstanding commitments for additional funding to
limited partnership investments.

In the normal course of its proprietary trading activities, the
Company enters into transactions in financial instruments with
off-balance-sheet risk. These financial instruments, primarily
options, contain off-balance-sheet risk inasmuch as ultimate
settlement of these transactions may have market
and/or
credit risk in excess of amounts which are recognized in the
consolidated financial statements. Transactions in listed
options are conducted through regulated exchanges, which clear
and guarantee performance of counterparties.

Also, in connection with its proprietary trading activities, the
Company has sold securities that it does not currently own. The
Company will therefore be obligated to purchase such securities
at a future date. The Company has recorded this obligation in
the financial statements at market values of the related
securities and will record a trading loss if the market value of
the securities increases subsequent to the consolidated
financial statements date.

(a)

Broker-Dealer
Activities

The Company clears securities transactions on behalf of
customers through its clearing brokers. In connection with these
activities, customers unsettled trades may expose the
Company to off-balance-sheet credit risk in the event customers
are unable to fulfill their contracted obligations. The Company
seeks to control the risk associated with its customer
activities by monitoring the creditworthiness of its customers.

(b)

Derivative
Financial Instruments

The Companys derivative activities consist of writing and
purchasing listed equity options and futures on interest rate
and currency products for trading purposes and are included in
financial instruments owned, at fair value in the accompanying
consolidated statements of financial condition. As a writer of
options, the Company receives a cash premium at the beginning of
the contract period and bears the risk of unfavorable changes in
the value of the financial instruments underlying the options.
Options written do not expose the Company to credit risk since
they obligate the Company (not its counterparty) to perform.

In order to measure derivative activity, notional or contract
amounts are frequently utilized. Notional contract amounts,
which are not included on the consolidated statements of
financial condition, are used as a basis to calculate
contractual cash flows to be exchanged and generally are not
actually paid or received.

A summary of the Companys listed options and futures
contracts is as follows:

Current

Average

End of

Notional

Fair

Period

Amount

Value

Fair Value

September 30, 2007:

Purchased options

$

2,100

$

104

$

72

Written options

$

9,020

$

29

$

141

Short futures contracts

$

19,874

$



$



December 31, 2006:

Purchased options

$

500

$

92

$

160

Written options

$

400

$

87

$

5

Short futures contracts

$

2,375

$



$



(7)

Concentrations
of Credit Risk

The Company is engaged in various securities trading and
brokerage activities servicing primarily domestic and foreign
institutional investors. Nearly all of the Companys
transactions are executed with and on behalf of institutional
investors, including other brokers and dealers, commercial
banks, mutual funds, and

other financial institutions. The Companys exposure to
credit risk associated with the nonperformance of these
customers in fulfilling their contractual obligations pursuant
to securities transactions can be directly impacted by volatile
securities markets.

A substantial portion of the Companys financial
instruments owned are common stock and debt of financial
institutions. The credit
and/or
market risk associated with these holdings can be directly
impacted by factors that affect this industry such as volatile
equity and credit markets and actions of regulatory authorities.

(8)

Notes
Receivable from Stockholders

Notes receivable from stockholders represent full recourse notes
issued to employees for their purchases of stock acquired
pursuant to the Companys book value stock purchase plan.
Loans are payable in annual installments and bear interest
between 2.7% and 5.0% per annum.

(9)

Common
Stock

Prior to the completion of the IPO and termination of the 2005
Amended and Restated Stockholders Agreement, common stock
was considered mandatorily redeemable and the amounts classified
as stockholders equity were previously classified as a
liability captioned as mandatorily redeemable common stock.
Amounts classified as net income were previously classified as
net income available to mandatorily redeemable common
stockholders. Earnings per share were previously classified as
net income available to mandatorily redeemable common
stockholders per share.

(10)

Non-Monetary
Transaction

In the third quarter of 2007, the Company received cash and
warrants exercisable in common stock as advisory fees in
connection with the closing of a private placement transaction.
The warrants received were measured at fair value on the closing
date of the transaction. The Company recorded investment banking
revenues of $6,518 as a result of this non-monetary transaction
for the three and nine months ended September 30, 2007.
Shortly after the closing of the private placement transaction,
the Company exercised these warrants and received common stock.

(11)

Stock-Based
Compensation

At September 30, 2007, the Company had two types of
stock-based compensation arrangements: RSUs and the 2006 Equity
Incentive Plan (the Plan). There was no material
change to the RSU balance in 2007.

The Plan permits the granting of up to 6,150,000 shares of
common stock. As part of the 2006 year-end performance
award process (2006 Bonus Awards), the Company
granted 360,067 restricted stock awards (RSAs) under
the Plan to certain directors and employees in February 2007.
The aggregate fair value of the 2006 bonus awards granted in
February 2007 was $10,752. This value was based upon the grant
date share price of $29.86. RSAs are actual shares of common
stock issued to the participant that are restricted. The 2006
Bonus Awards generally vest over a three year period. Vesting
would accelerate on a change in control, death or permanent
disability. Unvested RSAs are subject to forfeiture upon
termination of employment.

For 2006 Bonus Awards that were granted to retirement-eligible
employees, the Company recognized the grant date fair value as
compensation expense for such awards on the date of grant
instead of over the service period specified in the award terms.
For employees who will be retirement-eligible prior to vesting
of the 2006 Bonus Awards, the Company recognizes compensation
expense from the grant date to the retirement eligibility date.
The Company recorded non-cash incremental compensation expense
of $740 and $4,336 in the three and nine months ended
September 30, 2007, respectively, for the 2006 Bonus
Awards. Accelerated compensation expense associated with grants
to retirement-eligible employees (including employees who will
be retirement-eligible prior to vesting) for the nine months
ended September 30, 2007 was $2,106. Prior to 2007, the

Company did not grant stock-based awards which would require
accelerated expense recognition upon retirement under
SFAS No. 123(R).

(12)

Earnings
Per Share

In connection with the IPO, the Company completed a 43 for 1
stock split on November 1, 2006 (see Note 2).
Accordingly, basic and diluted shares for all periods presented
have been calculated based on the average shares outstanding, as
adjusted, for the stock split.

The computations of basic and diluted earnings per share are set
forth below:

Three Months Ended

Nine Months Ended

September 30,

September 30,

2007

2006

2007

2006

Numerator for basic and diluted
EPS-net
income

$

5,535

$

9,310

$

23,650

$

27,860

Denominator for earnings per common share 
weighted-average common shares outstanding:

Basic

30,665,945

26,749,483

30,636,898

27,013,417

Effect of dilutive securities  restricted stock

880,331



900,290



Diluted

31,546,276

26,749,483

31,537,188

27,013,417

Earnings per common share:

Basic

$

0.18

$

0.35

$

0.77

$

1.03

Diluted

$

0.18

$

0.35

$

0.75

$

1.03

(13)

Income
Taxes

Effective January 1, 2007, the Company adopted the
provisions of FIN 48. FIN 48 prescribes the
recognition and measurement criteria related to tax positions
taken or expected to be taken in a tax return. For those
benefits to be recognized a tax position must be
more-likely-than-not to be sustained upon examination by taxing
authorities. The Company had no cumulative effect of adopting
FIN 48, and therefore, no adjustment was recorded to
retained earnings upon such adoption. In addition, the following
information required by FIN 48 is provided:



Unrecognized tax benefits including interest were approximately
$5.8 million as of January 1, 2007 and approximately
$6.3 million as of September 30, 2007, the majority of
which, if recognized, would impact the effective tax rate.



Following the adoption of FIN 48, the Company continues to
classify interest and penalties, if any, related to tax
uncertainties as income taxes. As of January 1, 2007 and
September 30, 2007, $0.5 million and $0.8 million
of interest, net of federal tax benefit, respectively, were
included in the total unrecognized tax benefit indicated above.



The Company and its subsidiaries file federal consolidated and
various state, local and foreign tax returns. The federal income
tax returns have been audited through 2004. Various state, local
and foreign returns are subject to audits by tax authorities
beginning with the 2002 tax year. The settlement of certain
state and local audits within the next 12 months, if any,
is not anticipated to have a significant impact on the
Companys results or financial position.

The Company follows the provisions of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information, in disclosing its business segments. Pursuant
to that statement, an entity is required to determine its
business segments based on the way management organizes the
segments within the enterprise for making operating decisions
and assessing performance. Based upon these criteria, the
Company has determined that its entire business should be
considered a single segment. There were no individual customers
which contributed more than 10% to the Companys total
revenues.

(15)

Recent
Accounting Developments

In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 permits entities to
choose to measure financial assets and liabilities (except for
those that are specifically scoped out of the Statement) at fair
value. The election to measure a financial asset or liability at
fair value can be made on an
instrument-by-instrument
basis and is irrevocable. The difference between carrying value
and fair value at the election date is recorded as a transition
adjustment to opening retained earnings. Subsequent changes in
fair value are recognized in earnings. The effective date for
SFAS No. 159 is as of the beginning of an
entitys first fiscal year that begins after
November 15, 2007. The Company will adopt
SFAS No. 159 on January 1, 2008. The Company is
currently evaluating the impact, if any, the adoption of
SFAS No. 159 will have on its consolidated financial
statements.

(16)

Net
Capital Requirement

Keefe is a registered U.S. broker-dealer that is subject to
the Uniform Net Capital Rule (SEC
Rule 15c3-1
or the Net Capital Rule) administered by the SEC and FINRA,
which requires the maintenance of minimum net capital. Keefe has
elected to use the basic method to compute net capital as
permitted by the Net Capital Rule, which requires Keefe to
maintain minimum net capital, as defined, of $3,484 as of
September 30, 2007. These rules also require Keefe to
notify and sometimes obtain approval from the FINRA for
significant withdrawals of capital.

September 30, 2007

Net Capital

$

142,750

Excess Capital

$

139,266

KBWL is an investment firm authorized and regulated by the FSA
and is subject to the capital requirements of the FSA. As of
September 30, 2007, KBWL was in compliance with its local
capital adequacy requirements.

We have made statements in Managements Discussion
and Analysis of Financial Condition and Results of
Operations and in other sections of this
Form 10-Q
that are forward-looking statements. In some cases, you can
identify these statements by forward-looking words such as
may, might, will,
should, expect, plan,
anticipate, believe,
estimate, predict, potential
or continue, the negative of these terms and other
comparable terminology. These forward-looking statements, which
are based on various underlying assumptions and expectations and
are subject to risks, uncertainties and other unknown factors,
may include projections of our future financial performance
based on our growth strategies and anticipated trends in our
business. These statements are only predictions based on our
current expectations and projections about future events. There
are or may be important factors that could cause our actual
results, level of activity, performance or achievements to
differ materially from the historical or future results, level
of activity, performance or achievements expressed or implied by
such forward-looking statements. These factors include, but are
not limited to, those discussed under the section entitled
Risk Factors in our Annual Report on
Form 10-K
for the year ended December 31, 2006.

Although we believe the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, level of activity, performance or achievements.
Moreover, neither we nor any other person assumes responsibility
for the accuracy or completeness of any of these forward-looking
statements. You should not rely upon forward-looking statements
as predictions of future events. We are under no duty to update
any of these forward-looking statements after the date of filing
of this report to conform such statements to actual results or
revised expectations.

We are a leading full service investment bank specializing in
the financial services industry. Our principal activities are:



Investment banking. We provide a full range of
investment banking services, including M&A and other
strategic advisory services, equity and fixed income securities
offerings and structured finance.



Equity and fixed income sales and trading. We
trade a broad array of financial services stocks, with an
emphasis on the small and mid cap segment, and a wide range of
fixed income securities. Our sales force is trained in the
analysis of financial services companies and has strong
relationships with many of the worlds largest
institutional investors.

Our customers are primarily institutional investors which
include banks and thrifts, insurance companies, broker-dealers,
mortgage banks, asset management companies, mortgage REITs,
consumer and specialty finance firms, financial processing
companies and securities exchanges. We emphasize serving clients
in the small and mid cap segments of the financial services
industry, as we believe these clients have traditionally been
underserved by larger investment banks.

Most revenues with respect to our services provided are
primarily determined as a result of active competition in the
marketplace. Our revenues are primarily generated through
advisory, underwriting and private placement fees earned through
our investment banking activities, commissions earned on equity
and fixed income sales and trading activities, interest and
dividends earned on our securities inventories and profit
and losses from trading activities related to the
securities inventories.

Compensation and benefits comprise the most significant
component with respect to our expenses. Our performance is
dependant on our ability to attract, develop and retain highly
skilled employees who are motivated to provide quality service
and guidance to our clients.

Many external factors affect our revenues and profitability.
Such factors include equity and fixed income trading prices and
volumes, the volatility of these markets, the level and shape of
the yield curve, political events and regulatory developments
and competition. These factors influence our investment banking
operations, including the number and timing of equity and fixed
income securities issuances and M&A activity within the
financial services industry. These same factors also affect our
sales and trading business by impacting equity and fixed income
trading prices and volumes and valuations in secondary financial
markets. Commission rates, market volatility and other factors
also affect our sales and trading revenues. Such external
factors may contribute to significant fluctuations in our
revenues and earnings from period to period and the results of
any one period should not be considered indicative of our future
results.

A significant portion of our expense base is variable, including
employee compensation and benefits, brokerage and clearance,
communication and data processing and travel and entertainment
expenses. Our remaining costs generally do not directly relate
to the service revenues earned.

Certain data processing systems that support equity and fixed
income trading, research, payroll, human resources and employee
benefits are service bureau based and are operated in the
vendors data centers. We believe that this stabilizes our
fixed costs associated with data processing. We also license
vendor information databases to support investment banking,
sales and trading and research. Vendors may, at the end of
contractual terms, terminate our rights or modify or
significantly alter product and service offerings or related
fees, which may affect our ongoing business activities or
related costs.

We earn fees for underwriting securities offerings, arranging
private placements and providing strategic advisory services in
M&A and other transactions.



Underwriting revenues. We earn underwriting
revenues in securities offerings in which we act as an
underwriter, such as initial public offerings, follow-on equity
offerings and fixed income offerings. Underwriting revenues
include management fees, underwriting fees and selling
concessions, including fees related to mutual thrift
conversions. We record underwriting revenues, net of related
syndicate expenses, at the time the underwriting is completed.
In syndicated underwritten transactions, management estimates
our share of transaction-related expenses incurred by the
syndicate, and we recognize revenue net of such expense. On
final settlement, we adjust these amounts to reflect the actual
transaction-related expenses and our resulting underwriting fee.
We receive a higher proportion of total fees in underwritten
transactions in which we act as a lead manager.



Strategic advisory revenues. Our strategic
advisory revenues primarily include success fees, as well as
retainer fees, earned in connection with advising companies,
both buyers and sellers, principally in M&A. We also earn
fees for related advisory work and other services such as
providing fairness and valuation opinions. We record strategic
advisory revenues when the transactions or the services (or, if
applicable, separate components thereof) to be performed are
substantially complete, the fees are determinable and collection
is reasonably assured.



Private placement revenues. We earn agency
placement fees in non-underwritten transactions such as private
placements, including securitized debt offerings collateralized
by financial services issuers securities, which we refer
to as PreTSLs. We record private placement revenues
when the services related to the underlying transaction are
completed under the terms of the engagement. This is generally
the closing date of the transaction.

Since our investment banking revenues are generally recognized
at the time of completion of each transaction or the services to
be performed, these revenues typically vary between periods and
may be considerably affected by the timing of the closing of
significant transactions.

Our sales and trading revenues include commissions and principal
transactions revenues. The trading gains and losses include net
gains from trading for our own account and the results of
activities that support the facilitation of customer orders in
both listed and over-the-counter stocks and fixed income
securities.

Principal transactions. Fixed
Income  Our sales and trading revenues include net
trading gains and losses from acting as a principal in the
facilitation of customer orders. Our fixed income sales and
trading includes new issue and secondary market trading in
mortgage backed securities, U.S. government and agency
securities and corporate debt securities. We also maintain a
financial strategies group that advises customers on the
structure of their investment portfolios. Our loan portfolio
sales group also performs similar services arranging for the
purchase or sale of performing or non-performing loans.

Equities  Our sales and trading revenues
include net trading gains and losses from principal
transactions, which include investing in securities for our own
account. In addition, we act as a market-maker in
over-the-counter common equity securities. Our market-maker
positions are typically held for a short duration.

Interest and dividend income primarily includes interest earned
on our interest bearing assets including securities held for
securitization and interest and dividends on securities included
in financial instruments owned related to our sales and trading
business.

Investment advisory fees include management and investment
performance fees accrued on assets under management by KBW Asset
Management, a wholly owned registered investment advisor
subsidiary. Investment performance fees are not included in
revenues until the end of the performance period.

A significant portion of our expense base is variable, including
employee compensation and benefits, brokerage and clearance,
communication and data processing and travel and entertainment
expenses. We intend to maintain our employee compensation and
benefits expense within a general target range of 55% to 60% of
total revenues, although we may change this rate at any time.
This percentage range includes all cash and non-cash
compensation and benefit expense.

Non-compensation expenses include occupancy and equipment,
communications and data processing, brokerage and clearance,
interest and other expenses.

Compensation and benefits expense for our employees is the
principal component of our expenses and includes salaries,
overtime, bonuses, amortization expense with respect to grants
of restricted awards and restricted stock units of our common
stock, benefits, employment taxes and other employee costs. As
is the

widespread practice in our industry, we pay bonuses on an annual
basis, which for senior employees typically make up a large
portion of their total compensation. Cash compensation is
generally accrued based on a ratio of total compensation and
benefits to total revenues. We accrue for the estimated amount
of these bonus payments ratably over the applicable service
period. Bonus payments may have a greater impact on our cash
position and liquidity in the periods in which they are paid
than would otherwise be reflected in our consolidated statements
of income.

Beginning with the 2006 discretionary bonuses paid in February
2007, certain employees were compensated in cash and with
restricted stock awards. These awards generally vest and are
expensed ratably over a three-year service period from date of
grant. In the future, we expect that such awards will be a
portion of the compensation of certain employees.

Equity awards issued in connection with our initial public
offering (IPO) vest over a four-year period, subject
to continued employment. The non-cash compensation expense
associated with these awards will be amortized ratably over the
requisite service period.

These expenses include rent and utilities associated with our
various offices, depreciation of leasehold improvements and
furniture and fixtures, occupancy and premises taxes and other
fixed asset service fees.

These expenses include costs for data processing and telephone
and data communication, primarily consisting of expenses for
obtaining third-party market data primarily used by personnel in
sales and trading. We also incur expenses related to electronic
trading network connections and depreciation of computer and
communication equipment.

We account for income taxes consistent with the asset and
liability method prescribed by SFAS 109 and FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109,
(FIN 48), which prescribes a single,
comprehensive model for how a company should recognize, measure,
present and disclose in its financial statements uncertain tax
positions that the company has taken or expects to take on its
tax returns. Income tax expense is based on pre-tax accounting
income, including adjustments made for the recognition or
derecognition related to uncertain tax positions. The
recognition or derecognition of income tax expense related to
uncertain tax positions is determined under the guidance as
prescribed by FIN 48. Deferred tax assets and liabilities
are recognized for the future tax attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to be

The Companys business activities focus on the financial
services sector and are uniquely impacted by economic and market
conditions affecting this sector. The outlook for the financial
services sector, including the market prices for the securities
of companies in the sector, such as the Company, should be
viewed against the backdrop of the global economies, financial
markets activity and the geopolitical environment, all of which
are integrally linked.

During the third quarter, concerns about the impact of
deterioration in credit quality for sub-prime loans spread to
affect the broader credit markets, leading to a repricing of
credit risks, general widening of credit spreads, lower levels
of liquidity and a significant decrease in transparency in
pricing for many classes of fixed income securities. In
addition, criteria used by rating agencies has also come under
scrutiny, with the possibility of future revisions to such
criteria and practices. There was increased volatility across
fixed income and equity markets which has led and could continue
to lead to reductions in trading revenues. This has been offset
by growth in equity commissions associated with higher trading
volumes. The broad impact of these trends, particularly in
respect of reported continuing write downs of inventory
positions associated with the CDO markets, has put significant
pressure on credit ratings and equity prices for companies in
the financial service sector. Tightening of credit may also
affect the ability of companies to finance M&A activity in
this sector. The Companys focus on the financial services
industry makes it susceptible to the economic factors which
particularly affect this industry segment.

It is difficult to predict how long these conditions will
continue. The performance of each of the Companys lines of
business will be affected by overall global economic growth,
financial market movements (including interest rate movements
and credit spread), the competitive environment and customer and
client activity levels in any given time period.

Results
of Operations

Three
Months Ended September 30, 2007 Compared with Three Months
Ended September 30, 2006

Total revenues increased $7.9 million, or 8.5%, to
$101.1 million for the three months ended
September 30, 2007 compared with $93.2 million for the
three months ended September 30, 2006. This increase was
primarily due to increases in investment banking, commissions
and interest and dividend income revenues of $10.9 million,
$19.0 million and $2.7 million, respectively, offset
by a decrease of $24.5 million in principal transactions,
net.

Total expenses increased $12.7 million, or 16.2%, to
$91.3 million for the three months ended September 30,
2007 compared with $78.6 million for the three months ended
September 30, 2006. This increase was due to increases in
compensation and benefits expense of $4.5 million and
non-compensation expenses of $8.2 million.

On a U.S. Generally Accepted Accounting Principles
(GAAP) basis, we recorded net income of
$5.5 million for the three months ended September 30,
2007 compared with $9.3 million for the three months ended
September 30, 2006. After excluding from net income a
non-GAAP adjustment related to the net of tax compensation and
benefits expense with respect to the amortization of the 2006
IPO restricted stock awards, the resulting non-GAAP net income
and the related diluted earnings per share decreased 21.7% and
34.3%, respectively, to $7.3 million and $0.23 per share,
respectively. This is compared with net income of
$9.3 million and diluted earnings per share of $0.35 for
the third quarter of 2006. See the section below entitled
 Three Month Non-GAAP Financial
Measures for a reconciliation to our GAAP results.

Our management has utilized non-GAAP calculations of presented
compensation and benefits expense, income before income tax
expense, income tax expense, net income, compensation ratio and
basic and diluted earnings per share that were adjusted in the
manner presented above as an additional device to aid in
understanding and analyzing our financial results for the three
months ended September 30, 2007. Specifically, our
management believes that the non-GAAP measures provide useful
information by excluding certain items that may not be
indicative of our core operating results and business outlook.
Our management believes that these non-GAAP measures will allow
for a better evaluation of the operating performance of our
business and facilitate meaningful comparison of our results in
the current period to those in prior periods and future periods.
Our reference to these non-GAAP measures should not be
considered as a substitute for results that are presented in a
manner consistent with GAAP. These non-GAAP measures were
provided to enhance investors overall understanding of our
current financial performance.

A limitation of utilizing these non-GAAP measures of
compensation benefits expense, income before income tax expense,
income tax expense, net income, compensation ratio and basic and
diluted earnings per share is that the GAAP accounting effects
of these events do in fact reflect the underlying financial
results of our business and these effects should not be ignored
in evaluating and analyzing our financial results. Therefore,
management believes that both our GAAP measures of compensation
benefits expense, income before income tax expense, income tax
expense, net income, compensation ratio and basic and diluted
earnings per share and the same respective non-GAAP measures of
our financial performance should be considered together.

In accordance with SFAS No. 123(R), Share-Based
Payment we measure compensation cost for stock-based awards
at fair value on the date of grant and recognition of
compensation expense generally over the service period for
awards expected to vest. Such grants were recognized as expenses
over the requisite service period, net of estimated forfeitures.

In this report we include our compensation and benefits expense,
income before income tax expense, income tax expense, net
income, compensation ratio and basic and diluted earnings per
share on a non-GAAP basis for the three months ended
September 30, 2007. Such non-GAAP results exclude the
expense resulting from the amortization of stock awards
associated with the grant of the November 2006 IPO restricted
stock awards to our employees. Therefore, there is no
reconciling item for compensation expense for the three and nine
months ended September 30, 2006.

We expect to grant restricted stock awards and other share-based
compensation in the future. We do not expect to make substantial
grants to employees outside of our regular compensation and
hiring process, as we did when we granted IPO restricted stock
awards in connection with our IPO.

The following provides details with respect to reconciling
compensation and benefits expense, income before income tax
expense, income tax expense, net income, compensation ratio and
basic and diluted earnings per share on a GAAP basis for the
three months ended September 30, 2007 to such items on a
non-GAAP basis in the same period:

(Dollars in thousands, except per share information)

Three Months Ended:

9/30/2007

9/30/2006

GAAP

Reconciliation

Non-GAAP

GAAP

Compensation and benefits expense

$

58,658

$

(3,128

)(a)

$

55,530

$

54,118

Income before income tax expense

$

9,862

$

3,128

(a)

$

12,990

$

14,641

Income tax expense

$

4,327

$

1,372

(b)

$

5,699

$

5,331

Net income

$

5,535

$

1,756

(c)

$

7,291

$

9,310

Compensation ratio(d)

58.0

%

54.9

%

58.1

%

Earnings per share:

Basic

$

0.18

$

0.06

$

0.24

$

0.35

Diluted

$

0.18

$

0.05

$

0.23

$

0.35

Weighted average number of common shares outstanding:

Basic

30,665,945



(e)

30,665,945

26,749,483

Diluted

31,546,276



(e)

31,546,276

26,749,483

(a)

The non-GAAP adjustment represents the pre-tax expense with
respect to the amortization of the IPO restricted stock awards
granted to employees on November 8, 2006.

(b)

The non-GAAP adjustment with respect to income tax expense
represents the elimination of the tax benefit resulting from the
amortization of the IPO restricted stock awards in the period.

(c)

The non-GAAP adjustment with respect to net income was the
after-tax amortization of the IPO restricted stock awards in the
period.

(d)

The compensation ratio with respect to the three months ended
September 30, 2007 and 2006 was calculated by dividing
compensation and benefits expense by total revenues of $101,135
and $93,212, respectively.

(e)

Both the basic and diluted weighted average number of common
shares outstanding were not adjusted.

Investment banking revenues increased $10.9 million, or
22.2%, to $60.1 million for the three months ended
September 30, 2007 compared with $49.2 million for the
three months ended September 30, 2006. Underwriting
revenues increased $17.3 million, or 176.8%, to
$27.1 million and M&A advisory fees increased
$6.8 million, or 39.2%, to $24.1 million in the third
quarter of 2007 compared with the same period in 2006. The
increases in underwriting revenues and M&A advisory fees
were primarily due to a larger than average underwriting
transaction and a larger than average M&A advisory deal,
each of which closed in the third quarter of 2007. These
increases were offset by a $13.1 million, or 59.4%, decline
in private placement revenues in the third quarter of 2007
compared with the same period in 2006.

In the third quarter of 2007, we received cash and warrants
exercisable in the customers company stock as advisory fees in
connection with the closing of a private placement transaction.
The warrants received were measured at fair value on the closing
date of the transaction. We recorded investment banking revenues
of $6.5 million as a result of this non-monetary
transaction in 2007. Shortly after the closing of the private
placement transaction, we exercised these warrants and received
common stock.

Commissions revenues increased $19.0 million, or 74.5%, to
$44.5 million for the three months ended September 30,
2007 compared with $25.5 million for the three months ended
September 30, 2006, primarily due to increases of
$9.1 million and $9.9 million in commissions revenue
related to our European and U.S. equity activities,
respectively.

Principal transactions revenue decreased $24.5 million to a
loss of $14.9 million for the three months ended
September 30, 2007 compared with revenue of
$9.6 million for the three months ended September 30,
2006. Such decrease was primarily the result of:



Unrealized losses on fixed income securities including
securities held for PreTSL securitizations.



Higher equity market making losses.



Lower gains on equity securities trading for our own account.



Decreased volume in transactions with customers in fixed-income
securities, leading to lower aggregate markups and markdowns.

Interest and dividend income increased $2.7 million, or
35.8%, to $10.3 million for the three months ended
September 30, 2007 compared with $7.6 million for the
three months ended September 30, 2006. This increase was
primarily due to higher average holdings of interest bearing
financial instruments.

Compensation and benefits expense increased $4.5 million,
or 8.4%, to $58.7 million for the three months ended
September 30, 2007 compared with $54.1 million for the
three months ended September 30, 2006. In the third quarter
of 2007, compensation and benefits expense included
$3.1 million related to the non-cash expense resulting from
the amortization of restricted stock awards granted in
connection with the November 2006 IPO.

Compensation and benefits expense as a percentage of total
revenue, after deducting from such expense the non-cash
amortization expense associated with the IPO restricted stock
awards, was 54.9% in the third quarter of 2007 compared with
58.1% in the same 2006 period. The unadjusted compensation and
benefits percentage of total revenue in the third quarter of
2007 was 58.0%. See the section above entitled
 Three Month Non-GAAP Financial
Measures for a reconciliation to our GAAP results.

Communications and data processing expense increased
$1.1 million, or 21.4%, to $6.2 million for the three
months ended September 30, 2007 compared with
$5.1 million for the three months ended September 30,
2006. This increase was primarily due to higher market data and
network communications costs.

Brokerage and clearance expense increased $2.4 million, or
60.0%, to $6.4 million for the three months ended
September 30, 2007 compared with $4.0 million for the
three months ended September 30, 2006. This increase was
primarily due to increased clearing expenses resulting from
strong customer volume in equity sales.

Interest expense increased $1.6 million, or 53.0%, to
$4.6 million for the three months ended September 30,
2007 compared with $3.0 million for the three months ended
September 30, 2006. This increase was primarily due to
higher financing expense related to fixed income inventory.

Other expense increased $2.7 million, or 34.5%, to
$10.5 million for the three months ended September 30,
2007 compared with $7.8 million for the three months ended
September 30, 2006. The increase was primarily due to
higher professional fees, insurance costs and business
development costs.

Income tax expense was $4.3 million for the three months
ended September 30, 2007, which equals an effective tax
rate of 43.9%, compared with to $5.3 million for the three
months ended September 30, 2006, which equals an effective
tax rate of 36.4%. The increase in the effective tax rate
reflects the reversal of 2005 tax provisions as a result of the
finalization and filing of 2005 state and local tax returns
in the third quarter of 2006. Such final returns reflected lower
than estimated tax liabilities for 2005 for state and local
taxes as a result of favorable allocations of taxable income
among various state and local jurisdictions for 2005.

Total revenues increased $35.8 million, or 12.5%, to
$322.2 million for the nine months ended September 30,
2007 compared with $286.4 million for the nine months ended
September 30, 2006. This increase was primarily due to
increases in investment banking, commissions and interest and
dividend income revenues of $31.2 million,
$33.8 million and $8.2 million, respectively, offset
by a decrease of $38.4 million in principal transactions,
net. In the first nine months of 2006, principal transactions,
net included a gain of $5.0 million resulting from the
conversion of our New York Stock Exchange seat for cash and
shares of NYSE Group, Inc.

Total expenses increased $41.6 million, or 17.5%, to
$279.9 million for the nine months ended September 30,
2007 compared with $238.3 million for the nine months ended
September 30, 2006. This increase was due to an increase in
compensation and benefits expense of $22.0 million and
non-compensation expenses of $19.6 million.

We recorded net income of $23.7 million for the nine months
ended September 30, 2007 compared with $27.9 million
for the nine months ended September 30, 2006. After
excluding from net income a non-GAAP adjustment related to the
net of tax compensation and benefits expense with respect to the
amortization of the 2006 IPO restricted stock awards, the
resulting non-GAAP net income increased $1.0 million, or
3.5%, to $28.9 million. This is compared with
$27.9 million for the first nine months of 2006. Diluted
earnings per share, on a non-GAAP basis, decreased 11.7% to
$0.91 per share for the first nine months of 2007, compared to
$1.03 per share for the same 2006 period. See the section below
entitled  Nine Month Non-GAAP Financial
Measures for a reconciliation to our GAAP results. Net
income and diluted earnings per shares for the first nine months
of 2006 included an after-tax gain with respect to the New York
Stock Exchange seat conversion of $2.8 million and $0.09
per diluted share, respectively.

The following table provides a comparison of our revenues and
expenses for the periods presented (dollars in thousands):

The following provides details with respect to reconciling
compensation and benefits expense, income before income tax
expense, income tax expense, net income, compensation ratio and
basic and diluted earnings per share on a GAAP basis for the
nine months ended September 30, 2007 to such items on a
non-GAAP basis in the same period:

(Dollars in thousands, except per share information)

Nine Months Ended:

9/30/2007

9/30/2006

GAAP

Reconciliation

Non-GAAP

GAAP

Compensation and benefits expense

$

188,882

$

(9,290

)(a)

$

179,592

$

166,847

Income before income tax expense

$

42,229

$

9,290

(a)

$

51,519

$

48,066

Income tax expense

$

18,579

$

4,088

(b)

$

22,667

$

20,206

Net income

$

23,650

$

5,202

(c)

$

28,852

$

27,860

Compensation ratio(d)

58.6

%

55.7

%

58.3

%

Earnings per share:

Basic

$

0.77

$

0.17

$

0.94

$

1.03

Diluted

$

0.75

$

0.16

$

0.91

$

1.03

Weighted average number of common shares outstanding:

Basic

30,636,898



(e)

30,636,898

27,013,417

Diluted

31,537,188



(e)

31,537,188

27,013,417

(a)

The non-GAAP adjustment represents the pre-tax expense with
respect to the amortization of the IPO restricted stock awards
granted to employees on November 8, 2006.

(b)

The non-GAAP adjustment with respect to income tax expense
represents the elimination of the tax benefit resulting from the
amortization of the IPO restricted stock awards in the period.

(c)

The non-GAAP adjustment with respect to net income was the
after-tax amortization of the IPO restricted stock awards in the
period.

(d)

The compensation ratio with respect to the nine months ended
September 30, 2007 and 2006 was calculated by dividing
compensation and benefits expense by total revenues of $322,166
and $286,357, respectively.

(e)

Both the basic and diluted weighted average number of common
shares outstanding were not adjusted.

Investment banking revenues increased $31.2 million, or
21.9%, to $174.1 million for the nine months ended
September 30, 2007 compared with $142.8 million for
the nine months ended September 30, 2006. Underwriting
revenues increased $26.4 million, or 64.9%, to
$67.1 million and M&A advisory fees increased
$29.2 million, or 82.4%, to $64.6 million for the nine
months ended September 30, 2007 compared with the same
period in 2006. The increases in underwriting revenues and
M&A advisory fees were primarily due to larger than average
underwriting transactions and larger than average M&A
advisory deals closing in 2007. These increases were offset by a
$24.3 million, or 36.3%, decline in private placement
revenues in the first nine months of 2007 compared with the same
period in 2006. The closing of a larger than average transaction
in the second quarter of 2006 contributed to this comparative
decline in the nine months ended September 30, 2007.

Commissions revenues increased $33.8 million, or 39.3%, to
$119.9 million for the nine months ended September 30,
2007 compared with $86.0 million for the nine months ended
September 30, 2006, primarily due to increases of
$18.4 million and $15.4 million in commissions revenue
related to our European and U.S. equity activities,
respectively.

Principal transactions revenue decreased $38.4 million to a
loss of $3.1 million for the nine months ended
September 30, 2007 compared with revenue of
$35.3 million for the nine months ended September 30,
2006, reflecting the difficult market conditions in 2007
including the market dislocation in the third quarter. In
addition, in the first nine months of 2006, principal
transactions, net included a gain of $5.0 million on the
conversion of our New York Stock Exchange seat for cash and
shares of NYSE Group, Inc.

Interest and dividend income increased $8.2 million, or
42.5%, to $27.5 million for the nine months ended
September 30, 2007 compared with $19.3 million for the
nine months ended September 30, 2006. This increase was
primarily due to higher average holdings of interest bearing
financial instruments.

Compensation and benefits expense increased $22.0 million,
or 13.2%, to $188.9 million for the nine months ended
September 30, 2007 compared with $166.8 million for
the nine months ended September 30, 2006. In the nine
months ended September 30, 2007, compensation expense
included $9.3 million related to the non-cash expense
resulting from the amortization of restricted stock awards
granted in connection with the November 2006 IPO. Also included
in the nine months ended September 30, 2007 was
$4.3 million relating to the amortization of 2006 bonus
restricted stock awards granted in February 2007, of which
$2.1 million related to accelerated compensation expense
associated with grants to employees who were or will be eligible
to retire prior to the vesting date.

Compensation and benefits expense as a percentage of total
revenue, after deducting from such expense the non-cash
amortization expense associated with the IPO restricted stock
awards, was 55.7% for the nine months ended September 30,
2007 compared with 58.3% in the same 2006 period. The unadjusted
compensation and benefits percentage of total revenue for the
nine months ended September 30, 2007 was 58.6%. See the
section above entitled  Nine Month
Non-GAAP Financial Measures for a reconciliation to
our GAAP results.

Communications and data processing expense increased
$3.4 million, or 23.5%, to $17.8 million for the nine
months ended September 30, 2007 compared with
$14.4 million for the nine months ended September 30,
2006. This increase was primarily due to higher market data and
network communications costs.

Brokerage and clearance expense increased $2.4 million, or
16.2%, to $17.4 million for the nine months ended
September 30, 2007 compared with $15.0 million for the
nine months ended September 30, 2006. This increase was
primarily due to increased clearing expenses resulting from
strong customer volume in equity sales.

Interest expense increased $3.0 million or 36.2% to
$11.3 million for the nine months ended September 30,
2007 compared with $8.3 million for the nine months ended
September 30, 2006. This increase was primarily due to
higher financing expense related to fixed income inventory.

Other expense increased $9.9 million, or 47.6%, to
$30.6 million for the nine months ended September 30,
2007 compared with $20.7 million for the nine months ended
September 30, 2006. The increase was primarily due to
higher professional fees, insurance costs and business
development costs.

Income tax expense was $18.6 million for the nine months
ended September 30, 2007, which equals an effective tax
rate of 44.0%, compared with $20.2 million for the nine
months ended September 30, 2006, which equals an effective
tax rate of 42.0%. The increase in the effective tax rate
reflects the reversal of 2005 tax provisions as a result of the
finalization and filing of 2005 state and local tax returns
in the third quarter of 2006. Such final returns reflected lower
than estimated tax liabilities for 2005 for state and local
taxes as a result of favorable allocations of taxable income
among various state and local jurisdictions for 2005.

The preparation of our consolidated financial statements
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and of revenues and
expenses during the reporting periods. We base our estimates and
assumptions on historical experience and on various other
factors that we believe are reasonable under the circumstances.
The use of different estimates and assumptions could produce
materially different results. For example, if factors such as
those described in Risk Factors cause actual events
to differ from the assumptions we used in applying the
accounting policies, our results of operations, financial
condition and liquidity could be materially adversely affected.

Our significant accounting policies are summarized in
Note 2 to our unaudited consolidated financial statements.
On an ongoing basis, we evaluate our estimates and assumptions,
particularly as they relate to accounting policies that we
believe are most important to the presentation of our financial
condition and results of operations. We regard an accounting
estimate or assumption to be most important to the presentation
of our financial condition and results of operations where:



The nature of the estimate or assumption is material due to the
level of subjectivity and judgment necessary to account for
highly uncertain matters or the susceptibility of such matters
to change; and



The impact of the estimate or assumption on our financial
condition or operating performance is material.

Substantially all of the Companys financial instruments,
as defined in Statement of Financial Accounting Standards
(SFAS) No. 107, Disclosures About Fair Value
of Financial Instruments, are recorded at fair value or
contract amounts that approximate fair value.
SFAS No. 107 defines fair value of a financial
instrument as the amount that would be received to sell an asset
or paid to transfer a liability, between market participants as
of the measurement date other than in a forced sale or
liquidation. Financial instruments owned and financial
instruments sold, not yet purchased are stated at fair value,
with related changes in unrealized appreciation or depreciation
reflected in principal transactions, net in the accompanying
consolidated statements of income. Financial instruments carried
at contract amounts include receivables from clearing brokers,
payable to clearing broker, securities purchased under resale
agreements, short-term borrowings and securities sold under
repurchase agreements.

The Company elected to early adopt SFAS No. 157,
Fair Value Measurements, as of January 1, 2007.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and requires enhanced
disclosures about fair value measurements.
SFAS No. 157 defines fair value as the price
that would be received to sell an asset and paid to transfer a
liability in an ordinary transaction between market participants
at the measurement date. Additionally,
SFAS No. 157 disallows the use of block discounts on
positions traded in an active market as well as nullifies
certain guidance in Emerging Issues Task Force
No. 02-3
regarding the recognition of inception gains on certain
derivative transactions. See Note 3 of the Notes to
Consolidated Financial Statements for a complete discussion on
SFAS No. 157.

Under SFAS No. 157, fair value is generally based on
quoted market prices. If quoted market prices are not available,
fair value is determined based on other relevant factors,
including dealer price quotations, price activity for equivalent
instruments and valuation pricing models. Among the factors
considered by the Company in determining the fair value of
financial instruments are discount margins, weighted average
spreads, discounted anticipated cash flows, the terms and
liquidity of the instrument, the financial condition, operating
results and credit ratings of the issuer or underlying company,
the quoted market price of publicly traded securities with
similar duration and yield, as well as other measurements.

Equity interests in certain private securities and limited
partnership interests are reflected in the consolidated
financial statements at fair value, which is often represented
at initial cost until significant transactions or developments
indicate that a change in the carrying value of the securities
is appropriate. This represents the Companys best estimate
of exit price as defined by SFAS No. 157. The
Companys partnership interests are generally recorded at
fair value based on valuations provided by general partners.
Generally, the carrying values of these securities will be
increased based on company performance and in those instances
where market values are readily ascertainable by reference to
substantial transactions occurring in the marketplace or quoted
market prices. Reductions to the carrying value of these
securities are made when the Companys estimate of net
realizable value has declined below the carrying value.

We entered into a sublease in August 2007 for additional space
in the NewYork office, expected to commence June 2008. Future
minimum lease payments are expected to be approximately $0 for
2007, $1,000 for 2008, $3,000 for 2009, $3,000 for 2010, $3,000
for 2011 and $11,000 thereafter. Contractual obligations have
not otherwise significantly changed since December 31, 2006.

We had no material off-balance sheet arrangements as of
September 30, 2007. However, as described below under
 Qualitative and Quantitative Disclosures About
Market Risk  Credit Risk, through
indemnification provisions in our clearing agreements with our
clearing brokers, customer activities may expose us to
off-balance sheet credit risk, which we seek to mitigate through
customer screening and collateral requirements.

We are a member of various exchanges that trade and clear
securities or futures contracts. As a member of these exchanges,
we may be required to pay a proportionate share of the financial
obligations of another member who may default on its obligations
to the exchange. To mitigate these performance risks, the
exchanges often require members to post collateral as well as
meet minimum financial standards. While the rules governing
different exchange memberships vary, our guarantee obligations
generally would arise only if the exchange had previously
exhausted its resources. In addition, any such guarantee
obligation would be apportioned among the other non-defaulting
members of the exchange. Any potential contingent liability
under these membership agreements cannot be estimated. We have
not recorded any contingent liability in our consolidated
financial statements for these agreements and believe that any
potential requirement to make payments under these agreements is
remote.

In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 permits entities to
choose to measure financial assets and liabilities (except for
those that are specifically scoped out of the Statement) at fair
value. The election to measure a financial asset or liability at
fair value can be made on an
instrument-by-instrument
basis and is irrevocable. The difference between carrying value
and fair value at the election date is recorded as a transition
adjustment to opening retained earnings. Subsequent changes in
fair value are recognized in earnings. The effective date for
SFAS No. 159 is as of the beginning of an
entitys first fiscal year that begins after
November 15, 2007. We will adopt SFAS No. 159 on
January 1, 2008. We are currently evaluating the impact, if
any, the adoption of SFAS No. 159 will have on our
consolidated financial statements.

We are the parent of Keefe, Bruyette & Woods, Inc.
(Keefe), Keefe, Bruyette & Woods Limited
(KBWL), KBW Asset Management, Inc. and KBW Ventures,
Inc. Dividends and other transfers from our subsidiaries are our
primary source of funds to satisfy our capital and liquidity
requirements. Applicable laws and regulations, primarily the net
capital rules discussed below, restrict dividends and transfers
from Keefe and KBWL to us. Our rights to participate in the
assets of any subsidiary are also subject to prior claims of the
subsidiarys creditors, including customers and trade
creditors of Keefe, KBWL and KBW Asset Management.

We monitor and evaluate the composition and size of our assets
and operating liabilities. As a result of our market making,
customer and proprietary activities (including securitization
activities), the overall size of total assets and operating
liabilities fluctuate from period to period. Our assets
generally consist of cash and cash equivalents, securities,
resale agreement balances and receivables.

Our operating activities generate cash resulting from net income
earned during the period and fluctuations in our current assets
and liabilities. The most significant fluctuations in current
assets and liabilities have resulted from changes in the level
of customer activity, changes in financial instruments owned on
a proprietary basis and investment positions in response to
changing trading strategies and market conditions.

We have historically satisfied our capital and liquidity
requirements through capital raised from our stockholders and
internally generated cash from operations. As of
September 30, 2007, we had liquid assets of
$331.7 million, primarily consisting of cash and cash
equivalents, securities purchased under resale agreements and
receivables from clearing brokers. We also periodically utilize
short term bank debt to finance certain capital securities
positions held at the holding company level to support the
PreTSL product pool formation. On one occasion in the past six
years, we obtained a short term subordinated loan from one of
our clearing brokers to support underwriting activity over a
very short time period. Although we believe such sources remain
available, we do not currently have any plans to obtain such
short-term subordinated financing from any outside source.

The timing of cash bonus payments to our employees may
significantly affect our cash position and liquidity from period
to period. While our employees are generally paid salaries
semi-monthly during the year, cash bonus payments, which make up
a larger portion of total compensation, are generally paid once
a year. Cash bonus payments for a given year are generally paid
in February of the following year. We continually

monitor our liquidity position and believe our available
liquidity will be sufficient to fund our ongoing activities over
the next twelve months.

As a registered broker-dealer and member firm of the NYSE, Keefe
is subject to the uniform net capital rule of the SEC. We use
the basic method permitted by the uniform net capital rule,
which generally requires that the ratios of aggregate
indebtedness to net capital shall not exceed 15 to 1. The NYSE
may prohibit a member firm from expanding its business or paying
dividends if resulting net capital would be below the regulatory
limit. We expect these limits will not impact our ability to
meet current and future obligations.

At September 30, 2007, Keefes net capital under the
SECs Uniform Net Capital Rule was $142.8 million, or
$139.3 million in excess of the minimum required net
capital.

KBWL is subject to the capital requirements of the U.K.
Financial Services Authority.

Nine months ended September 30,
2007. Cash increased $10.3 million during
the nine months ended September 30, 2007, primarily as a
result of cash generated through our operating activities.

Operating activities for the nine months ended
September 30, 2007 produced $8.8 million. This
positive cash flow resulted from net income of
$23.7 million, reduced for non-cash revenue and expense
items of $1.2 million and cash provided from the increase
in operating liabilities of $48.1 million offset by cash
used through the increase in operating assets of
$61.8 million. The non-cash adjustments consisted of
non-monetary revenue of $6.5 million, amortization of
stock-based compensation related to restricted stock of
$15.9 million, depreciation and amortization expense of
$3.6 million, and deferred income tax benefits of
$14.2 million. Cash generated from the increase in
operating liabilities consisted primarily of an increase in
securities sold under repurchase agreements of
$38.6 million and short-term borrowings of
$56.3 million offset by declines in accounts payable,
accrued expenses and other liabilities of $33.0 million,
financial instruments sold, not yet purchased, at fair value of
$10.9 million, and income taxes payable of
$3.9 million. The cash used in the increase in the
operating assets was primarily attributable to an increase in
financial instruments owned, at fair value of
$153.2 million, partially offset by a decline in
receivables from clearing brokers of $78.4 million and
securities purchased under resale agreements of
$13.9 million.

We used $2.2 million in our investing activities, primarily
in the purchase of fixed assets. Cash provided from financing
activities increased $2.6 million primarily as a result of
the repayment of loans which were provided to certain employees
in connection with their purchase of our common stock.

Nine months ended September 30,
2006. Cash increased by $0.3 million for the
nine months ended September 30, 2006, primarily as a result
of cash provided by operating activities partially offset by
cash used in financing and investing activities.

Our operating activities for the nine months ended
September 30, 2006 provided cash of $5.3 million. Net
income for that period, adjusted for non-cash expense items of
$6.5 million, was $34.4 million. Non-cash expenses
consisted primarily of depreciation and amortization of
$4.4 million and compensation expense related to restricted
stock units of $1.3 million. Operating liabilities
increased $38.3 million, and were offset by increases in
operating assets of $67.4 million. The increases in
operating assets consisted primarily of a $42.3 million
increase in receivables from clearing brokers, a
$46.2 million increase in financial instruments owned, at
fair value, partially offset by decreases of $11.1 million
and $10.9 million in securities purchased under resale
agreements and accounts receivable, respectively. Cash provided
by operating liabilities consisted primarily of increases of
$84.4 million in securities sold under repurchase
agreements and $55.1 million in financial instruments sold,
not yet purchased, at fair value partially offset by a
$68.1 million and $31.5 million decrease in payable to
clearing broker and in short-term borrowings, respectively.

Our investing activities used cash of $2.0 million in the
purchase of furniture, equipment and leasehold improvements.

Our financing activities used $3.8 million primarily as a
result of purchases of common stock from stockholders of
$11.0 million partially offset by repayments of notes
receivable from stockholders of $6.5 million.

Market risk represents the risk of loss that may result from the
change in value of a financial instrument due to fluctuations in
its market price. Market risk may be exacerbated in times of
trading illiquidity when market participants refrain from
transacting in normal quantities
and/or at
normal bid-offer spreads. Our exposure to market risk is
directly related to our role as a financial intermediary in
customer trading and to our market making and investment
activities. Market risk is inherent in financial instruments.

We trade in equity and debt securities as an active participant
in both listed and over-the-counter markets. We typically
maintain securities in inventory to facilitate our market making
activities and customer order flow. We may use a variety of risk
management techniques and economic hedging strategies in the
ordinary course of our trading business to manage our exposures.

In connection with our sales and trading business, management
also reviews reports appropriate to the risk profile of specific
trading activities. Management monitors risks in its trading
activities by establishing limits for each trading desk and
reviewing daily trading results, inventory aging, securities
concentrations and ratings. Typically, market conditions are
evaluated and transaction details and securities positions are
reviewed. These activities seek to ensure that trading
strategies are within acceptable risk tolerance parameters.
Activities include price verification procedures, position
reconciliations and reviews of transaction bookings. We believe
these procedures, which stress timely communications between
traders, trading management and senior management, are important
elements of the risk management process.

The following table sets forth our month-end high, low and
average fair value of long/short securities owned for the nine
months ended September 30, 2007:

Interest rate risk represents the potential loss from adverse
changes in market interest rates. As we may hold debt securities
from time to time, we are exposed to interest rate risk arising
from changes in the level and volatility of interest rates and
in the shape of the yield curve. Interest rate risk is primarily
managed through the use of short positions in U.S. Treasury
and corporate debt securities.

We engage in various securities underwriting, trading and
brokerage activities servicing a diverse group of domestic and
foreign corporations and institutional investor clients. Our
exposure to credit risk associated

with the nonperformance of these clients in fulfilling their
contractual obligations pursuant to securities transactions can
be directly impacted by volatile trading markets which may
impair the clients ability to satisfy its obligations to
us. Our principal activities are also subject to the risk of
counterparty nonperformance. Pursuant to our Clearing Agreements
with Pershing LLC, Pershing Securities Limited and Fortis
Securities LLC, we are required to reimburse our clearing broker
without limit for any losses incurred due to counterpartys
failure to satisfy its contractual obligations. In these
situations, we may be required to purchase or sell financial
instruments at unfavorable market prices to satisfy obligations
to other customers or counterparties. We seek to mitigate the
risks associated with sales and trading services through active
customer screening and selection procedures and through
requirements that clients maintain collateral in appropriate
amounts where required or deemed necessary.

Because our assets are, to a large extent, liquid in nature,
they are not significantly affected by inflation. However, the
rate of inflation affects such expenses as employee compensation
and communications charges, which may not be readily recoverable
in the prices of services we offer. To the extent inflation
results in rising interest rates and has other adverse effects
on the securities markets, it may adversely affect our
consolidated financial condition and results of operations.

Operational risk is the risk of loss resulting from inadequate
or failed internal processes, people and systems or from
external events. We are focused on maintaining our overall
operational risk management framework and minimizing or
mitigating these risks through continual assessment, reporting
and monitoring of potential operational risks.

Our management, with the participation of the Chief Executive
Officer and the Chief Financial Officer (our principal executive
officer and principal financial officer, respectively),
evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report.

Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of the
current quarter covered by this report, our disclosure controls
and procedures are effective to ensure that information required
to be disclosed by us in the reports filed or submitted by us
under the Exchange Act, is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms, and include controls and procedures designed to
ensure that information required to be disclosed by us in such
reports is accumulated and communicated to our management,
including the Chief Executive Officer and the Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure.

There was no change in our internal control over financial
reporting that occurred during our most recent fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

PART II 
OTHER INFORMATION

ITEM 1.

Legal
Proceedings

Except as discussed in the following paragraph, the information
required to be disclosed pursuant to this Item has been
previously reported (as such term is defined in
Rule 12b-2
of the Exchange Act) in Item 3 of our Annual Report on
Form 10-K
for the year ended December 31, 2006 and in Note 5 of
Part I, Item 1 of our Quarterly Reports on
Form 10-Q
for the quarters ended June 30, 2007 and March 31,
2007.

On September 7, 2007, a New York Stock Exchange Hearing
Board accepted the Companys Stipulation of Facts and
Consent to Penalty in connection with an investigation into
certain violations relating to prospectus delivery practices by
the Company during the period from July 1, 2003 through
October 31, 2004. The findings were part of a
sweep investigation involving 15 brokerage firms,
all of whom entered into consents. Penalties include fines
ranging from $375,000 to $2,250,000 and various ancillary
corrective actions. The Company, without admitting or denying
guilt, entered into the agreement to pay a fine of $375,000 and
agreed to certain undertakings.

ITEM 1A.

Risk
Factors

There have not been any material changes from the risk factors
previously disclosed in Item 1A of our Annual Report on
Form 10-K
for the year ended December 31, 2006.

ITEM 2.

Unregistered
Sales of Equity Securities and Use of Proceeds

The net offering proceeds to us from the IPO were
$75.4 million, which amount includes the portion of the
aggregate underwriters discount attributable to Keefe, a
lead underwriter of the offering and our wholly-owned
subsidiary. We have used approximately $21 million of such
proceeds to increase the regulatory capitalization of KBWL, our
U.K. broker dealer subsidiary. The remaining proceeds remain
invested in a money market fund. It is our expectation that the
remaining proceeds will be used for general corporate purposes,
including providing seed capital for new asset management funds,
support for our securization transactions and expansion
opportunities for our investment banking and broker dealer
businesses.

The table below sets forth the information with respect to
purchases made by or on behalf of KBW, Inc. or any
affiliated purchaser (as defined in
Rule 10b-18(a)(3)
under the Exchange Act), of our common stock during the quarter
ended September 30, 2007.

All shares purchased were other than as part of a publicly
announced plan or program. The purchased shares consist of
common stock previously purchased by employees with funds loaned
by us that were subsequently forfeited by such employees upon
their departure. As a result of such forfeitures, the
outstanding balances on the related loans were reduced to zero.

(2)

All shares were immediately retired upon purchase by us.

ITEM 3.

Defaults
Upon Senior Securities

None.

ITEM 4.

Submission
of Matters to a Vote of Security Holders

None.

ITEM 5.

Other
Information

Effective November 9, 2007, the Board of Directors (the
Board) of the Registrant approved an amendment to
the Registrants second amended and restated certificate of
incorporation, which amendment changed the location of the
Registrants registered office in the state of Delaware as
well as the name of the Registrants registered agent.

Also effective November 9, 2007, the Board appointed
Michael J. Zimmerman, a director that was elected to the Board
on October 26, 2007, to the Audit Committee.
Mr. Zimmerman was appointed to the Audit Committee in
replacement of James K. Schmidt. Mr. Schmidts status
as a member of the Board, a member of the Compensation Committee
and a member and chairperson of the Corporate Governance and
Nominations Committee, remains unchanged.

Second Amended and Restated Certificate of Incorporation of KBW,
Inc. (as further amended effective November 9, 2007).

10

.1

Sublease between Keefe, Bruyette & Woods, Inc. and
National Financial Partners Corp., dated as of August 31,
2007 (incorporated by reference to Exhibit 10.1 to the
Registrants current report on
Form 8-K
filed September 7, 2007).

31

.1

Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)
or 15d-14(a) of the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31

.2

Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)
or 15d-14(a) of the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32

.1

Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

32

.2

Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.